Zero Sum games

[Lee Shepherd]

This maybe true with managers/directors working longer hours. I can only speak for myself here but I'm sure many other(successfull) traders work many hours past the standard 8 a day. For example I'll catch up and watch news channels and read papers at the weekend, maybe read a market related book to refresh or further educate myself. This is of course all unpaid until the contracts are sold off for a profit, or loss maybe. And then theres my standard 12 hour week days, this of course excludes travelling as theres none involved.

I think the issue there could be sacrifice or having/making the opportunity, if an employee was to get paid many hundreds of thousands per year then I'm sure they too would work the hours just like mangers/directors ect.

I suppose thats why so many people want to be traders, theres this concept flying around that people say it's difficult when it's not. I've rarely heard it's difficuly, quite the opposite. I dont quite get that as from most people /websites and traders alike all say it's relatively easy, you just have to study it like a college course then follow through with the constant monitoring that the markets require you to do to stay ahead of the rest.

Running a restaurant is relatively easy. Providing of course you know what your doing and have the startup capital.

Winning 'who wants to be a millionaire' is relatively easy providing you know all 15 questions.

I agree that everyone won't become a millionaire, but the idea that people's wealth is derived from other's poverty is demonstrably false. It's precisely because of this that we now discuss wealth issues using terms such as "relative poverty" - the low wage earners today are clearly wealthier than their predecessors.

You may think that bosses and directors do the least, but in a meritocratic company, the senior managers and directors contribute a lot more value than an unskilled worker. Who works harder is less important than who adds more value: however my personal experience suggests that the directors are the hardest working of all people - most of the senior management in my company regularly work 16 hour days, give up time on weekends, and quite frankly work their guts out.

 

[Profitaker]

Ok. Some will make it and most won't, but everything I read doesn't define that as being zero sum. Zero sum means that in order for a participant to win X amount the other participant(s) must lose precisely X amount.

Correct.

But just how precise an observation is needed to prove a principle beyond reasonable doubt ? If an absolute observation is necessary, many (otherwise valid) principles would be blown away.

 

[arabianights]

Since it's a mathematical term, observation will never prove it. You need to start with axioms (deduced from observation in this case) and produce a proof (some philosoph of science I don't really know enough detail about but Hume, Popper and Khun are on my reading list for... ...eventually). This is pretty trivial to do with options with rock solid axioms. It's actually fairly trivial to prove not the case for stocks - there may be some quibbling around the axioms used though.

I probably mean assumption rather than axiom, but hey!

 

[grantx]

I only came across this thread this evening so obviously I had some catching up to do. So my choice was, what do I do this evening? Go out drinking and whoring or write a long response to this post? No contest.

Arbitrageur,

“The only time a trade is not zero-sum, AFAIK, is when new value is created”. I can only think of a change in implied volatility where this may apply. Let’s have a look:

For example,

short sells at 100
long buys at 100 (ignore the spread for simplicity)
IV jumps and option now worth 105.

To close,
short pays 105 (5 point loss)
long sells at 105 (5 point gain)
Equals zero-sum.

Well, we have what appeared to be “new value” but the net result doesn’t change. Maybe this example using IV is wrong.

Any ideas?

Rhody,

“In stocks, if you're long there isn't necessarily (and probably isn't) a short on the other side, so you can't say someone is losing if you're gaining.”

I reckon the market-makers are the shorts here – if they sell a stock which rises, at some point I presume they will have to buy back (at a loss) to keep a flat book.

Fifty2aces,

“only the distribution between participants changes”. That’s the bottom line.

Arbitrageur,

“But i can see how the stock as an asset creates value, because from the date of first issue, the company takes the first "sell" and then each stock changes hands from there on at different values, there isnt, in principle, someone short for every long, just a seller who is passing the asset on.”

After flotation the company drops out of the equation. Then only players in the new game (the zero-sum game) are the market-makers and investors. See my reply to Rhody above.

Arabiannights,

“Where do company profits go to?

Answer: Shareholders.

Therefore equities are not a zero sum game.”

You seem to be implying the shareholders are the winners, the company the losers. Strictly speaking I don’t think this is correct. Yes, the shareholders (investors or market-makers) gain financially but the cash loss to the company is offset/compensated by the proceeds/opportunity gain of the flotation.

Rhody,

“That's a theoretical view and nothing more”. Sure, but you need a theoretical basis for valuation, eg as in Black-Scholes for options. I think Arbitrageur’s view re reduction in the value of stock ex-div is a basic example of the non-violation of arbitrage conditions.

Intradaybill,

10 shares issued at 10 = 100 gain for company.
Where you state that company loss = -100 is incorrect – the company gains the proceeds of the flotation. You could argue this aspect is zero-sum, ie the company gains 100 but loses ownership (or part) of the company.

“Since the company is valued at 200, the amount the buyer paid, this means that the owners who issued shares lost 100”. Post-flotation, the company drops out of the equation – subsequent price movements affect only the shareholders.

“According to basic economics, the owners lost money because they sold something valued at 200 for only 100.” Doesn’t basic economics dictate that the value (cost) of something is what someone is willing to sell (buy) at a particular time? Initially, the company was considered to be worth 100; subsequently it was considered to be worth 200. Is the initial valuation incorrect? Perhaps the second valuation is incorrect. In other words, all valuations are either correct or incorrect. Perhaps neither are correct. I think they are both correct. Does economics have a retrospective valuation theory? Revisions of inconsistencies doesn’t seem a particularly convincing valuation model.

“This will explain to you why recent IPOs are issued above market value.” I think you are confusing market value with the initial valuation, ie the premium over the book value. This premium may be increased if demand outstrips supply.

Arabiannights,

“That's double entry accounting, not a zero sum game!” Excellent.

Hume, Popper and Khun. I’ve read ‘em. If I remember correctly, Popper tries to develop Hume’s premise of the inadequacies of induction (or was it deduction?), hence the origin of Taleb’s Black Swan. Basically, they’re all bolllocks – Bertrand Russell said the scientific rationalism of the Enlightenment died overnight because of Hume (and his bitch Bishop Berkeley). Popper’s theories gained some acceptance in the 60’s, especially by French academic Marxists and sociologist. Which is ironic because the basic premise of Popper was to illustrate the non-scientific basis for Marxist-Leninism (to which the Vienna Circle was heading, and they didn’t like Popper). Popper was a right-wing, reactionary sh1t-bag. Interesting reading all the same

Grant.